Managing Price Risk Paresh Shah Agri Business Corporation.

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Presentation transcript:

Managing Price Risk Paresh Shah Agri Business Corporation

Major Concerns  Poor returns on labor and investments  Lack of non farm opportunities  Yield  Price  Input  Technology  Credit  Water availability-Need for harvesting

Alternatives available  Contract Farming  Forward Sell  Hedge in Futures market  Options on Exchange Not yet available in India

Why the farmers do not hedge ?  Knowledge  Quantity / Lot size  Delivery Mechanism  Storage / warehouse norms  Grading of goods  LIQUIITY / FINANCE  No PAN Card / No official funds

Is it possible to hedge ? ?  Exchange traded contracts permit delivery only in a specific city / cities.  Provisions for initial margin  Can the debt ridden farmer arrange for MTM ?  Can he deliver goods on the exchange ?  If not, then the price difference between spot and futures market while he settles contract on the exchange.

Illustration  A farmer hedges 10 MT Chana on April’09 contract in November at Rs Contract value = Rs. 2,20, 000  7% for 6 months = Rs. 15,400  Provision for MTM anticipating price can rise upto Rs.2700 = Rs. 50,000  Margin during last days 5 of delivery tender period = 25 % = Rs.55,000  Approximate Transaction Cost = Rs  DOES FARMER ACTUALLY HAVE SO MUCH MONEY ??

Other limitations  Banks / Institutions give loans but do not extend OD limits against demat goods.  Even when delivery request for goods has been accepted by the exchange in the last 5 days of contract expiry, the seller is suppose to pay additional margin upto 40 % irrespective of the fact that he has goods and even the exchange recognizes his delivery intention. (In case of goods where early pay in is not allowed.)

Possible reforms  Crop insurance should encourage hedging and partly willing to bear the margin.  Increasing the no. of delivery centers.  Lot size in accordance with the average output of a farmer.  Considering price fluctuations, margin requirements(Initial+m2m) is big. Funding towards this has to be arranged.

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